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September 9, 1982

Peter BREYER and Mildred Breyer, his wife, Plaintiffs,
FIRST NATIONAL MONETARY CORP., a Michigan corporation, Defendant

The opinion of the court was delivered by: ACKERMAN

 Plaintiffs are a husband and wife residing in New Jersey. Defendant FNMC is a Michigan corporation in the business of trading gold, silver, and other metals pursuant to standardized contracts it terms "leverage" and "cash forward" contracts. Defendant is registered with the Commodity Futures Trading Commission (CFTC) as a Commodity Trading Advisor. *fn1" It is not a member of an organized commodities exchange, nor are its contracts traded on such an exchange. It markets its standardized contracts directly to the customer.

 The Customer Account Agreement executed by the plaintiffs on September 6, 1979 is one of FNMC's "cash forward" contracts. Under the provisions of the contract, the customer makes a deposit, the amount of which is set as a percentage of the purchase price of the particular commodity being purchased. *fn2" The purchase price is set unilaterally by FNMC. Although full payment is not due until the date of delivery, the customer may be called on to increase the amount of the deposit if the value of the commodity falls before the delivery date. Under the contract, the customer has the choice of taking delivery on or before the transaction, or of converting to an FNMC "leverage account". The contract contains an arbitration clause providing for the arbitration of any disputes arising from the contract. *fn3"

 Between September 1979 and March 1980, FNMC engaged in a number of commodities transactions for plaintiffs' cash forward account. In January 1980, plaintiffs purchased 6,000 ounces of silver for delivery at a later date at $40.95 per ounce. Subsequently, the value of silver dropped. Pursuant to the Agreement defendant issued a call for additional collateral to bring the account up to the required maintenance level. When plaintiffs failed to respond to the call, defendant liquidated their account as authorized by the contract by selling the silver. After the sale, there was a deficit of $61,263.08. On March 15, 1982, to satisfy the deficit, defendant instituted arbitration proceedings against the plaintiffs in Detroit, Michigan.

 On April 5, 1982, plaintiffs filed this action alleging that defendant fraudulently induced them to enter the commodities trading agreement by misrepresenting the level of risk involved and that defendant subsequently manipulated plaintiffs' account for its own benefit. Plaintiffs claim that this conduct violated various provisions of the Securities Act of 1933, 15 U.S.C. § 77a et seq., the Securities Exchange Act of 1934, 15 U.S.C. § 78a; the Securities Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5; the Commodity Exchange Act, 7 U.S.C. § 1 et seq., and the New Jersey Uniform Securities Law, N.J.S.A. 49:3-46. Plaintiffs also allege various common law claims for fraud, breach of fiduciary duty, breach of contract, and negligence based on diversity jurisdiction.

 On May 21, 1982, I signed a Temporary Restraining Order and ordered defendant to show cause why it should not be preliminarily enjoined from proceeding with arbitration pending the outcome of this litigation. *fn4" The parties submitted briefs and presented oral argument. Because the facts relevant to the injunction were largely undisputed, no witnesses were called to testify. Subsequently plaintiffs filed a motion for summary judgment on the Third Count of their Amended Complaint. I will first consider plaintiffs' application for a preliminary injunction.

 A preliminary injunction is not granted as a matter of right. Eli Lilly & Co. v. Premo Pharmaceutical Laboratories, Inc., 630 F.2d 120, 136 (3d Cir.), cert. denied, 449 U.S. 1014, 101 S. Ct. 573, 66 L. Ed. 2d 473 (1980). The decision to grant or deny such relief is left to the sound discretion of the trial court. Kershner v. Mazurkiewicz, 670 F.2d 440, 443 (3d Cir. 1982). In order to obtain a preliminary injunction, the movant must ordinarily demonstrate both 1) that he will probably succeed in the eventual litigation and 2) that he would suffer imminent and irreparable injury if the relief were not granted. Kershner, supra, at 443. These two factors are prerequisites to the granting of a preliminary injunction. Constructors Ass'n. of Western Pennsylvania v. Kreps, 573 F.2d 811, 815 (3d Cir. 1978). Where relevant, the court may also consider 3) injury to other parties that might result from the grant or denial of the injunction, and 4) the public interest. Id. When the movant has made the requisite showing of irreparable injury and likelihood of success on the merits, the court must balance all four factors in an "attempt to minimize the probable harm to legally protected interests between the time that a motion for a preliminary injunction is filed and the time of the final hearing." Id., at 815.

 Where the injunctive relief sought is a stay of arbitration, the inquiry is somewhat different. Because the right to proceed with an arbitration must be based upon agreement of the parties, the court must determine any issues which may preclude arbitration of the underlying dispute. See H. Prang Trucking Co., Inc. v. Local Union No. 469, 613 F.2d 1235, 1239 (3d Cir. 1980). The focus is not on whether the movant will ultimately succeed in the underlying dispute, but whether he must pursue that dispute through arbitration.

 It is uncontested that the Customer Account Agreement which plaintiffs signed contained a clause requiring arbitration of any dispute arising from the contract if either party so desired. *fn5" Plaintiffs contend, however, that the agreement is a "futures contract" which under the Commodities Exchange Act (CEA) may be legally offered only through an exchange designated by the CFTC as a "contract market". Because defendant's Customer Account Agreement was not offered on such an exchange, they argue, it is illegal and not binding. *fn6" Plaintiffs further argue that the arbitration clause itself is unenforceable because its format does not conform to the regulations governing arbitration clauses promulgated by the CFTC.

 The defendant argues in response that its Customer Account Agreement is not a "futures contract", but a "leverage contract" as defined in § 19 of the CEA, 7 U.S.C. § 23. Leverage contracts, although subject to regulation by the CFTC, are not required to be traded on a designated contract market. Defendant further argues that the CFTC regulations governing arbitration, 17 C.F.R. § 180.1 et seq., by their terms apply only to futures contracts, not leverage contracts. *fn7"

 In my judgment, I need not determine at this juncture whether the FNMC Customer Account Agreement is a futures contract or a leverage contract. Regardless of how one characterizes the agreement, I do not believe that the arbitration clause is enforceable under the circumstances in this case.

 It is well established that federal policy favors arbitration as a means of resolving disputes. H. Prang Trucking Co., Inc. v. Local Union No. 469, supra, at 1239. The Federal Arbitration Act, 9 U.S.C. § 1 et seq., implements this policy. Section 2 of the Act provides that a written arbitration clause "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." A judicially created exception to the Arbitration Act has been established, however, in cases involving protective federal legislation. See, e.g., Wilko v. Swan, 346 U.S. 427, 74 S. Ct. 182, 98 L. Ed. 168 (1953) (securities); Applied Digital Technology, Inc. v. Continental Casualty Co., 576 F.2d 116 (7th Cir. 1978) (antitrust); Allegaert v. Perot, 548 F.2d 432, 437 (2d Cir.) cert. denied, 432 U.S. 910, 97 S. Ct. 2959, 53 L. Ed. 2d 1084 (1977) (bankruptcy); Beckman Instruments, Inc. v. Technical Development Corp., 433 F.2d 55 (7th Cir. 1970) cert. denied, 401 U.S. 976, 91 S. Ct. 1199, 28 L. Ed. 2d 326 (1971) (patent); cf. Alexander v. Gardner-Denver Co., 415 U.S. 36, 94 S. Ct. 1011, 39 L. Ed. 2d 147 (1974) (Title VII claim). Implicit in this line of cases is the principle that the arbitral forum is not adequate to effectuate the policies underlying protective legislation.

 The protective legislation exception comes into play when there is a conflict between the competing fundamental policies of "federal statutory protection of a large segment of the public, frequently in an inferior bargaining position, and encouragement of arbitration as a 'prompt, economical and adequate solution of controversies.'" American Safety Equipment Corp. v. J.P. Maguire & Co., 391 F.2d 821, 826 (2d Cir. 1968) (quoting Wilko v. Swan, 346 U.S. at 438, 74 S. Ct. at 188 (1953)). ...

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